Intellectual Property and the Challenge of China

In July 2004, 12 drug manufacturers in China successfully challenged Pfizer's Viagra patent, in effect gaining the ability to make sildenafil citrate-containing drugs with impunity. A month later, GlaxoSmithKline (GSK) bowed out from a dispute over the diabetes drug rosiglitazone (Avandia) after four Chinese manufacturers filed requests to invalidate their formulation patent. The manufacturers can now legally produce a version of the drug, although GSK retains the exclusive right to manufacture Avandia itself, as it holds patents on the manufacturing process and compound. "We saw the case was not that robust and decided it was sensible to withdraw," says GSK spokesman Chris Hunter-Ward. Experts are following the two cases closely for indications of what this means for China's legal system, and its ability to protect patents. Pfizer launched an appeal in September 2004 with Bei-jing's First Intermediate People's Court. In March, a Chinese court adjourned a hearing on Pfizer's appeal and said a verdict will be delivered at a later date. At the time of the decision, Pfizer's chairman and chief executive, Henry McKinnell, said the company was "extremely disappointed" and that the decision could discourage Pfizer from making further investments in China. Deputy US Trade Representative Josette Shiner described the challenge to Pfizer's patent as "particularly troubling" and the American Chamber of Commerce in China questioned China's commitment to respecting the intellectual property (IP) rights of foreign companies. However, if Pfizer ultimately loses the case, it is unlikely to deter other drug manufacturers from the Chinese market, according to Alan Adcock, senior associate with IP consultants Rouse & Co. International. "The market's too attractive," he says. What it could do is push pharmaceutical companies to take patent protection in China more seriously, says Toby Mak, patent executive at international law firm Deacons in Hong Kong. "Chinese manufacturers are small, but if they can come together they have sufficient resources to play the patent game." Arguably, grappling with patent infringement goes with the territory of staking an early claim to China's huge and growing pharmaceuticals market. Western medicine accounts for 67% of the total market, of which over 70% is in the form of generic drugs, according to China's State Food and Drug Administration. Last year, China's pharmaceuticals market was the fastest growing in the world, with sales up 28% to $9.5 billion (US), according to international pharmaceutical and healthcare consultants IMS. By 2010, it is expected to be worth $24 billion. That number is peanuts compared to the $466 billion market in the US, but still the fifth largest in the world after the United States, Japan, Germany, and France. PATENTS IN CHINA A Booming Pharmaceutical Market Source: IMS Health, URC Estimated market size for ethical and OTC drugs excluding traditional Chinese medicine ($US billions) The State Intellectual Property Office (SIPO) is responsible for granting patents in China, as part of a system launched in 1984. The regulatory framework was modeled heavily on the European model, and went through a period of rapid development in the 1990s. "You're looking at a system that only came into existence 21 years ago, compared to US and Europe which have had patents systems for hundreds of years," says Paul Davies, a Hong Kong-based registered patent agent at Deacons. "I don't think anyone would pretend that China's system is as sophisticated, but in 21 years they've learned a lot." He notes that before 1994, Chinese law did not allow pharmaceutical compositions to be patented. Now there is little difference between patent law in China and the rest of the world. "Patent law is the most harmonized in the world, up to the level of very fine detail," says Mak. GSK knew that parts of their patent were vulnerable to cancellation, because the patent in question covered formulations containing 2 to 8 mg of rosiglitazone, or its pharmaceutically acceptable salts. The Chinese drug manufacturers successfully argued that a 1995 article in the Journal of Clinical Pharmacology, which cited a 4-mg level of the compound, was scientific knowledge in the public domain. GSK withdrew the patent on this formulation of the drug in China and worldwide, but Avandia is still protected by two types of patents in other major markets, and under a specific patent in China. Pfizer may have a better case when it comes to a reversal of SIPO's Patent Review and Adjudication Board (PRAB) decision. "There's always a chance of winning an appeal on the grounds of insufficiency, because it really is a technical point," says Doug Clark, a partner in the Shanghai office of the international law firm Lovells. When Pfizer filed its Viagra patent application with the member states of the Paris Convention in 1994, it fell foul of Chinese regulations covering nonpatentable treatment of disease. Pfizer then amended its claims, limiting it to the use of sildenafil citrate, and Pfizer was awarded its Viagra patent on Sept. 19, 2001. The same day, a Beijing citizen named Pan Huapin filed an invalidation request, which was then subsequently supported by 12 Chinese pharmaceutical manufacturers. In July 2004, the patent was overturned because of insufficiency, on the basis that the application lacked experimental data to support the technical effects of the drug in treating erectile dysfunction. Pfizer was similarly defeated in its defense of its patent for Viagra in Colombia and Venezuela, and in the United Kingdom, the patent was overturned on the grounds of lack of novelty. In China, Pfizer objected to the PRAB ruling saying that the rules regarding disclosure were changed after the patent was awarded and then imposed retroactively. However "retroactive application of the rules is just part of doing business in China," says Mak. Even if Pfizer wins the appeal, the case will go back to the PRAB, which then has to decide on other points in the patent challenge. This will tie the company up in further litigation. "That's not fair to Pfizer," says Clark. Pfizer declined to comment on the case. However, Clark notes that Chinese manufacturers at least now feel the need to challenge such patents in court, as outright counterfeiting may get them into trouble. GOING TO COURT RATHER THAN COUNTERFEITING China's Pharmaceutical Market is Dominated by Western Medicine: Source: Statistics of SFDA; Beijing Elite Internal Database; Beijing Elite Analysis A: Market share of western medicines versus traditional Chinese medicine, 2002. B: Market value share of patented products versus generics, 2002 (western medicine only). Since China emerged as the manufacturing powerhouse of the world in the 1990s, Beijing has come under increasing international pressure to defend the IP of foreign patent holders. "Over the last five years I have seen great improvement," says Ted Kavowras of Hong Kong-based IP investigator Panoramic Consulting. "I think the authorities genuinely understand that they need to be fair to grow and trade in the world market. They really have come around and are dealing with it aggressively." However, the challenge of patent enforcement remains. Patent infringement is rife. There are both direct copies and fakes of many western drugs freely available in China, and the problem is getting worse. "Counterfeit pharmaceuticals could not be made 10 or 20 years ago. China didn't have the facilities and expertise. In the case of illegal generics, a lot of the knowledge gained by counterfeiters is from the patents themselves," says Deacon's Davies. According to China's State Food and Drug Administration, 994 counterfeit drug manufacturers and distributors were closed down in 2003, taking $60 million worth of fake drugs out of circulation. However, China remains a key supplier of counterfeit drugs, and the successful seizures and closures are the tip of the iceberg. "They are stamping out fires and an overall coordinated strategy is not there," says David Fernyhough, Hong Kong-based executive vice president of international business risk consultants Hill and Associates. "It's also such a big problem that there is a resource issue for the authorities." Fernyhough explains that Beijing's success in tackling fake drug manufacturing has pushed facilities into Myanmar, North Korea, and Kazakhstan. However, the role that illegal Chinese manufacturers play in counterfeit drugs is of less concern to Beijing once their efforts successfully push the trade beyond their borders. "The people running the operations are Chinese nationals and the money behind them is organized crime money. The fakes turn up all over the world and one of the major concerns of the pharmaceutical industry is contamination of the legitimate supply chain by fakes, particularly via the Internet," says Fernyhough. THE ONGOING PROBLEM OF CORRUPTION Fernyhough notes that although factories are moving out of the country, "China still does have a problem with corruption and that needs to be acknowledged." It is generally up to the patent holders themselves to defend their products against illegal generic manufacturers. Needless to say, this can be difficult. "Pharmaceutical clients say the only way Chinese generic manufacturers could be so hot on their heels is because manufacturing information is leaked from the patents office or the Ministry of Health," says Adcock of Rouse & Co. "But if you press clients to give you evidence they can't because the people they are accusing of breaking the rules are the same people responsible for getting their products passed. It's quite anecdotal but it's what they all say," he adds. In the meantime, western drug manufacturers should be more aggressive when it comes to using legal means to protect IP in China, according to Deacon's Mak. "They should find better patent agents, file more actively, and adjust their prosecution and enforcement strategies in China more towards what they do in the US and Europe," he says. "They can get a fair hearing in China's legal system but they will have to put more resources than they originally expected in order to protect their IP." Industry observers say that it is unlikely that the Pfizer case will have any lasting damage for the industry as a whole, whether or not the company wins its appeal. One good sign is that the Pfizer decision wasn't followed by a flood of similar claims by Chinese pharmaceuticals manufacturers. "I was expecting to see more challenges and I haven't seen evidence of that happening," says Eric Noehrenberg, director of international trade and market policy at the International Federation of Pharmaceutical Manufacturers & Associations. The current situation may simply reflect China's present stage of social and economic development, and may change with time, Mak suggests. "It's like Japan 40 years ago," he says. "Japan was associated with knockoffs, and the great patent infringers of the past were the Japanese. In the 1990s Japan changed to a new ideas exporter and now they're the second biggest patent filers in the world." Related Article: Sweeting the Pot for Scientists

Intellectual Property and the Challenge of China

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May 2005

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